I asked ChatGPT o1 to answer the following query of mine:
Explain Bitcoin dust and transaction fee algorithms. I understand how UTXOs work. My concern is that as transaction fees grow over time, the threshold level for what constitutes dust may also increase.
ChatGPT's answer follows:

1. What is “dust” in Bitcoin?

In Bitcoin, dust typically refers to a UTXO (unspent transaction output) whose value is so small that the amount you would pay in fees to spend it is close to—or greater than—the output’s own value. In other words, dust outputs are uneconomical to spend under normal fee conditions.

Bitcoin Core implements a dust threshold to help nodes decide whether an output is standard or not. Any output smaller than this threshold is considered “dust” and is discouraged from being relayed or mined by default. For a typical Pay-to-Pubkey-Hash (P2PKH) output, the default dust threshold is often cited as 546 satoshis. Other script types (e.g., Pay-to-Script-Hash, SegWit, Taproot) can have slightly different thresholds, depending on the size of the output’s script and the cost to spend it.

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2. How is the dust threshold calculated?

The dust threshold is (roughly) determined by the following formula:

dust_threshold = 3 × the_minimum_relay_fee × spending_input_size

• the_minimum_relay_fee: The minimum fee (in satoshis per vByte) that a transaction must pay to be relayed by most nodes. By default, this is often set to 1 sat/vByte in Bitcoin Core.
• spending_input_size: The estimated size (in virtual bytes) of the input that would be required to spend this particular UTXO. Different script types have different sizes (e.g., legacy P2PKH is larger to spend than SegWit P2WPKH).

The factor of 3× is a heuristic that attempts to ensure that if fees rise slightly or the transaction is more complex, the output won’t suddenly become uneconomical. If the resulting calculation is, for example, 546 satoshis for a legacy P2PKH output, that becomes your dust threshold—meaning any P2PKH output smaller than 546 sat is considered dust.

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3. Why does the dust threshold matter?

• Wallet design: Wallets avoid creating outputs smaller than the dust threshold to reduce the risk of producing unspendable (or economically inefficient) outputs.
• Network and mempool policy: Nodes generally refuse to relay transactions that include “dust outputs” unless a higher fee offsets the cost. This helps keep the mempool from filling up with many tiny, uneconomical UTXOs.
• User experience: If you receive many small UTXOs (e.g., from faucets, tips, or microtransactions), you might find them difficult or expensive to combine and spend later if each is below (or near) the dust threshold.

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4. Transaction fee algorithms: How do fees get set?

Bitcoin transaction fees are determined by sat/vByte (or sat/weight unit) rather than by the absolute transaction amount. A transaction’s total fee is essentially:

Transaction Fee = Fee Rate (sat/vByte) × Transaction Size (vBytes)

When you construct a transaction, your wallet typically estimates the best fee rate by looking at:

1. Mempool conditions: If many transactions are waiting to be mined, the recommended fee rate goes up to get confirmed quickly. Conversely, when the mempool is empty, fee rates drop.
2. Desired confirmation time: Some wallets let you choose how fast you want your transaction to confirm (e.g., next block, within 3 blocks, etc.), which affects your fee.
3. Historical fee patterns: Many fee estimators look at past blocks to see which fees got confirmed within certain time frames.

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5. Will the dust threshold increase if fees grow?

Yes, it can. Since the dust threshold formula depends on the minimum relay fee (and effectively on the market fee environment), if the standard (or prevalent) fee rate on the network increases significantly and stays high, the threshold for dust would likely be recalculated upward in Bitcoin Core or by individual node operators:

1. Minimum relay fee changes: If nodes or miners raise their default relay fee from 1 sat/vByte to a higher value, the dust threshold calculation would yield a larger number.
2. Persistent high fees: If the network remains congested (similar to what we saw at times in 2017 and other peak usage periods), wallets and node policies might adjust to a higher “standard” fee environment, effectively pushing up the dust threshold.
3. Script improvements: On the other hand, more efficient script types (e.g., SegWit, Taproot) reduce the size needed to spend an output, potentially offsetting part of the effect of higher fees. Therefore, spending P2WPKH or Taproot outputs can have a lower dust threshold than legacy P2PKH.

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6. Practical implications & best practices

• Consolidate small outputs during low fee periods: If you have many small UTXOs near the dust threshold, wait for a less congested time on the network and consolidate them into a larger single output.
• Use SegWit / Taproot addresses: These reduce the input size in vBytes, lowering the effective dust threshold and fees.
• Monitor fee changes: The Bitcoin network’s fee environment can shift rapidly. Keep an eye on mempool congestion and recommended fee rates.
• Off-chain solutions: For frequent tiny payments, consider second-layer solutions (e.g., Lightning Network), which can handle small payments more cost-effectively.

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Key Takeaways

• Dust is any output so small that spending it is uneconomical under normal fee conditions.
• The dust threshold is calculated from the minimum relay fee, the size of the input needed to spend the UTXO, and a safety multiplier.
• Transaction fees are driven by sat/vByte. When fees rise, dust thresholds can also rise, making very small outputs increasingly impractical to spend.
• To manage dust, use efficient script types (SegWit, Taproot), consolidate small UTXOs when fees are low, and consider off-chain solutions for tiny payments.